Comparative Study of the Role of the Board of Directors betweenState-Owned Banks and Joint Stock Banks in Vietnam
Abstract
Restructuring of the current banking system in Vietnam has highlighted
the importance of corporate governance and, especially, the role of the board of
directors in Vietnam’s banks. However, research studies in corporate governance
in banking in Vietnam are limited. In this context, this paper contrasts actual
practices of the role of board of directors in two banks with different ownership
structures (i. E. A state-owned bank and a joint stock bank) To identify whether
there is a difference in the role of board of directors associated with different
ownership structures. The framework for evaluation is the OECD and Basel principles
of corporate governance. The paper starts with an introduction to the context and
the rationale of the research. It then summarises results of previous research studies
on corporate governance in international practice in section 2 and explains the
methodology employed in section 3. Finally, the paper evaluates current practices
of the board of directors of the two selected banks in section 4 and gives some
conclusions and recommendations in section 5. The results show that there is a significant
gap between actual practices of the responsibilities of the board of directors in
these two banks and international principles. There is also a noticeable deviation
of actual practice of the role of the board from Vietnam’s central bank regulations.
The lack of independence in the board, role of controlling shareholders and close
relationships among a group of directors are clearly found in the analysis. From
qualitative analysis, there is a noticeable difference in the performance between
the joint stock bank with a better role for the board of directors and the state-owned
bank.
Keywords: Bank, bank performance, board of directors, corporate
governance, Vietnam.
Author: Trần Thị Thanh Tú is Associate Dean, Faculty of Finance
and Banking, VNU University of Economics and Business, Hanoi, Vietnam. Email: Tuttt@vnu.
Edu. Vn.
1. Introduction
There is a rising trend of the issuance and application of corporate
governance guidelines by regulators and professional associations around the world.
These guidelines aim to provide a framework for best corporate governance practices
for companies, investors and other stakeholders to observe and use for benchmarking.
In Vietnam, corporate governance is not a well-established concept but it has become
a major concern of regulators, shareholders and related parties, especially in the
banking system, for various reasons.
First, the Asian financial crisis in 1997 revealed weaknesses
in corporate governance practices in Asian banks. Before 1997, the Asian economic
model was characterized by large, dominant corporate and family-owned corporations.
These corporations had financial subsidiaries (banks) Whose functions were to finance
internal financial needs within the corporations. As a result, connected lending
increased and this created more risk for those corporations. This problem was compounded
by weak regulation and supervision of central banks, creating a fragile banking
system, which was one of the reasons for the Asian crisis.
Second, the global financial crisis starting in 2008 has been
analyzed by central banks and academic institutes. Several reasons have been identified,
of which an inappropriate remuneration policy is one of the most widely agreed upon
ones. Bank directors and CEOs were blamed for being so heavily driven by short-term
profits that they took too much risk and ignored the long-term interests of banks
and shareholders. For this reason, the corporate governance framework has been reviewed
internationally.
Third, in Vietnam, privatization in the banking system started
in 2007. Before privatization, there were 34 joint stock commercial banks and five
state-owned banks. The banking system was highly concentrated with five state-owned
commercial banks accounting for 70 to 80% of total assets. Banks started to be privatized
in 2007. Vietcombank was the first bank to be privatized. During and after privatization,
there was a gradual and noticeable shift in the market share from stateowned commercial
banks to joint stock commercial banks. One of the reasons is the poor corporate
governance under long-term state ownership. Weaknesses in corporate governance in
state-owned commercial banks were revealed when these banks started to receive less
support from the government.
Finally, consolidation and reform in the Vietnam banking system
has been conducted by the government since 2005. In this process, laws and regulations
are revised and newly formulated in order to provide a proper legal framework for
the banking system. Regulations on banks' organization, prudential operation and
control have been revised. New regulations on prudential ratios in banking operation
took effect in October 2010. A new law on credit institutions was passed and took
effect in January 2011. In this reform process, improved corporate governance has
been one of the top priorities.
While corporate governance in Vietnam’s banking system has been
one of the major concerns of all market participants, research in this area is limited.
Several research projects and surveys in the corporate governance of Vietnam enterprises
highlighted that there is a big gap between the international principles and Vietnamese
regulations and a substantial deviation of actual practices from the regulations
(e. G. Cung & Robertson, 2005; Freeman & Lan, 2006). In this context, the
paper intends to analyze the actual practices and role of the board of directors
in Vietnamese banks. The results may give some exploratory information for further
empirical studies and bank regulations in Vietnam.
To evaluate the role of the board of directors in Vietnamese
banks, two banks among the top ten of all banks according to amount of capital were
selected so that they showed different types of management. One bank used to be
a state-owned commercial bank which had recently been privatized. The other is a
joint stock commercial bank. The analysis of the role of the board of directors
in the two Vietnamese banks highlighted several issues of corporate governance:
In general, most of OECD and Basel principles for the responsibilities
of board of directors are not observed or only partially observed in both banks.
There is a gap between the central bank’s regulations and actual practice in corporate
governance.
The ability of the board of directors’ supervisory board to maintain
independent business judgment is found to be limited. Lack of independent directors,
the role of social relations and the dominance of controlling shareholders are reasons
for less independent judgments.
There is a difference between the role of the board of directors
in the joint stock bank and the newly privatized bank. The former has adopted active
management processes and has been responsive to change. Delineation of responsibilities
is clearer in the former as compared to the latter.
Close relationships among a group of directors and dominance
of a group of related shareholders found in two banks should be further researched.
Such research would provide further implications for regulators.
2. Literature Review of Corporate Governance and the Board of
Directors’ Role in Banking
There are many definitions of corporate governance. The OECD
(2004) States that “Corporate governance is a system by which companies are directed
and controlled. “ La Porta et al. (2000) Consider corporate governance to be a set
of mechanisms with which outside investors protect themselves against problems arising
from conflicts of interest by managers and controlling shareholders. Although there
are different definitions of corporate governance, according to Pei Sai Fan (2004),
”… corporate governance is basically about
putting in place the structure, processes and mechanisms by which business and affairs
of the company are directed and managed in order to enhance the long term shareholder
value through accountability of managers.”
At a basic level, corporate governance problems arise when shareholders
wish to control their companies in a different way than the managers. These problems
are further complicated by conflicts among different shareholders due to diversity
in ownership. To solve these conflicts, proper corporate governance frameworks are
put in place. Five mechanisms in corporate governance are used to manage the conflicts:
(i) Hostile takeover;
(ii) Partial concentration of ownership
and control by large shareholders or a group of shareholders;
(iii) Delegation of partial control
to large creditors (e. G. Financial intermediaries);
(iv) Control of the CEO by the board
of directors and
(v) Alignment of managers’ interests
with shareholders through the remuneration policy. Among these mechanisms, the role
of the board of directors in controlling CEOs is perhaps most widely used. Most
corporate charters require that shareholders elect a board of directors, which monitors
the CEO on their behalf.
Research in the field of the board of directors has focused on
board composition and independence. The impact of independent directors on the efficiency
of the boards has been studied based on empirical data. The results are mixed. On
the one hand, practical findings support the hypothesis that independent directors
gave rise to an improvement in board efficiency. For example, the board with higher
independence can replace inefficient CEOs more easily. On the other hand, other
evidence suggested that there is no conclusive evidence on the effect of board independence
(Becht, 2007; Hermanlin & Weisbach, 1991).
In banking, the role of boards is of special importance and relevance.
This is because there is limited competition, intense regulation and high informational
asymmetry, which complicates the issue of bank governance (Levine, 2004). Research
studies in the role of the board of directors in banks also centered on board composition
and independence. Bank board composition and size is found to be related to the
abilities of the board in monitoring CEOs. However, excessively independent directors
can negatively affect board efficiency. The suggested optimum limit for the board
of an international bank is 19 directors (de Andres & Vallelado, 2008).
In Asian banks, research studies in corporate governance found
that the boards of Japanese banks did not fulfill their duty of monitoring properly,
especially before the financial crisis. CEOs were found to be wholly protected from
dismissal discipline resulting from poor performance. After the crisis, the situation
changed since the higher the number of directors replaced, the higher the performance
the bank experienced (Anderson & Campbell, 2004). In Southeast Asia, the privatization
of banks has been found to bring about better performance (William & Nguyen,
2005). This finding suggests that increasing the control of the boards as a consequence
of privatization has improved the bank performance.
In contrast to extensive literature on the role of the board,
there is limited analysis of the role of the boards and how the boards should be
regulated in practice. In Vietnam, there is no analysis or evaluation of regulations
of corporate governance in banks. However, the assessment of the corporate governance
of the Vietnamese market with respect to the OECD principles by the World Bank in
2006 highlighted a significant gap between practices and principles in corporate
governance (World Bank, 2006).
3. Methodology
3.1. Analytical Framework
The responsibilities of the board of directors are set out in
Principle 6 of OECD principles of corporate governance and in 8 Basel principles
on enhancing corporate governance. Among 6 sub-responsibilities mentioned in Principle
6, four are analyzed and evaluated for two cases: 1
Sub-principle 1: The board of directors should act on a fully
informed basis, in good faith, with due diligence, and care, and in the best interests
of the bank and shareholders
Sub-principle 2: Where board decisions may affect different shareholder
groups differently, the board should treat all shareholders fairly
Sub-principle 3: The board should fulfill certain key functions
as follows:
• Reviewing and guiding corporate strategy, major plans of action,
risk policy, annual budgets and business plans; Setting performance objectives;
Monitoring implementation and corporate performance; And overseeing major capital
expenditures and acquisitions 1 The other two sub principles are not analyzed due
to information constraints.
• Monitoring the effectiveness of the company's governance practices
and making changes as needed
• Selecting, compensating, monitoring and, when necessary, replacing
key executives and overseeing succession planning
• Aligning key executive and board remuneration with the longer
term interests of the company and its shareholders
• Ensuring a formal and transparent board nomination and election
process
• Monitoring and managing potential conflicts of interest of
management, board members and shareholders, including misuse of corporate assets
and abuse in related party transactions
• Ensuring the integrity of the corporation’s accounting and
financial reporting systems, including the independent audit, and that appropriate
systems of control are in place, in particular, systems for risk management, financial
and operational control and compliance with the law and relevant standards
Sub principle 4: The board should be able to exercise objective
independent judgment on corporate affairs.
3.2. Evaluation Scale
The corporate governance of each bank is analyzed and evaluated
against the above principles. Evaluation is based on four measures: Unobserved (UO),
partially observed (PO), materially observed (MO) And fully observed (FO). Each
sub-principle is considered as fully observed when all criteria and requirements
of a sub principle are met. Materially observed means that more than 50% of criteria
and requirements are met. Partially observed means that fewer than 50% of criteria
and requirements are met. The sub-principle is considered to be unobserved when
none of the criteria and requirements is met. If no information is disclosed or
obtained for a sub-principle, this subprinciple is also considered as unobserved.
3.3. Data and Information
In Vietnam, banking has always been considered to be an important
and sensitive economic area. As a result, disclosure is limited and the information
lacks consistency and comprehensiveness. For these reasons, it is very difficult
to obtain comprehensive information of the whole banking system in terms of corporate
governance. Consequently, two banks in the top ten according to capital, representing
the two main types of ownership (i. E. A newly-privatized, former state-owned bank
and a joint stock one) Have been selected as case studies. With the two case studies
selected, it is expected that the banks can provide evidence of common practices
in Vietnam’s banks. The source of information used is mainly secondary. There are
financial audited reports, charters, bank guidelines on operation and organization,
annual reports and other documents available. However, informal interviews with
bank managers and policy makers were also conducted to provide supplementary data.
4. Analysis of the Board of Directors' Role in Two Vietnamese
Banks
4.1. The Joint Stock Bank – Recently Transformed from a State-Owned
Commercial Bank (SOCB)
4.1.1. Overview of the Bank
The SOCB was established in late 1980s as one of the four largest
state-owned commercial banks. The bank ranks among the top five biggest banks in
terms of capital and has about 1,000 branches and transaction offices all over the
country. The SOCB was privatized from 2007–9. At present, the state remains the
controlling shareholder (with 70-80% of equity), according to bank reports in 2010.
The bank has a Board of Directors, a chief executive officer (CEO) Or general director
and a supervisory board. The supervisory board is subordinated to the general shareholder
meeting, not to the board of directors.
4.1.2. Board Duties
Sub-principle 1: The Board of Directors should act on a fully
informed basis, in good faith, with due diligence, and care, and in the best interest
of the bank and the shareholders (partially observed).
The “duty of care” and “duty of
loyalty” are both mentioned in
the bank’s charter but with some limitations. Firstly, the duty of care and due
diligence is not elaborated in detail. There is no code of conduct to explain which
behaviours a duly diligent person should exhibit in different situations. In addition,
the concept of due diligence is not well-established in Vietnam. The management
style, based on stateownership for 20 years, has become embedded in the management
philosophy of the bank. Many directors and managers in the SOCB are unable to differentiate
what behaviour they should exhibit. Furthermore, those who are aware of the commonly
expected behaviour are not always willing to act accordingly, as long as they can
benefit from their ignorance and their responsibility is not clear. For this reason
and without detailed guidelines on due diligence, the duty of care and due diligence
is materially not observed in practice. Secondly, duty of loyalty is elaborated
more clearly than the duty of care. The board of directors, the supervisory board,
the CEO and deputy CEO, as well as the branch managers, have to be loyal to the
interests of shareholders and the bank. They are not allowed to make use of the
information or business opportunities obtained through their role as directors for
their own interest or for the interests of other banks at the expense of the bank.
There are also cases where they are required to notify the Board of Directors in
full and timely form all the potential conflicts of interests and related party
transactions. So, from a regulatory perspective, the duty of loyalty is properly
defined. In practice, directors do not always act with loyalty because the bank
was only just privatized and it is generally perceived that the duty of loyalty
has not been conducted effectively in the state-owned enterprises.
Boards of directors are expected to be informed in a timely fashion
about all decisions and operational guidelines in all areas of the CEO and relation
to subordinates, while the deputy CEOs and chief accountants must reported to the
Board of Directors. The Board of Directors has meetings with the Board of Management
at least every quarter. However, the reliability and accuracy of information provided
is not confirmed because it depends on the bank’s accounting policy, which is that
of the Vietnam accounting standard (VAS) And the quality of internal audits and
control systems. Although there is a significant change in internal audit and control
structure and personnel, it will take time for the internal audit and control systems
of the bank to function independently due to the inherently inefficient internal
audit and control systems used under state management.
Sub-principle 2: Where board decisions may affect different shareholder
groups differently, the board should treat all shareholders fairly (unobserved).
Although the bank was privatized, the state remains the controlling
shareholder, with shares accounting for more than 80% of total share value (as of
December 31st, 2009). More than four of the seven directors had been managers of
the bank for years and the others were central bank staff. Consequently, although
it is stated in the bank guidelines that the board should act equally in the interests
of minority shareholders, actually equal treatment is not likely to be found.
Sub principle 3: The board should fulfill certain key functions:
Reviewing and guiding corporate strategy, major plans of action, risk policy, annual
budgets and business plans; Setting performance objectives; Monitoring implementation
and corporate performance; And overseeing major capital expenditures and acquisitions
(partially observed).
In the bank charter and guidelines on internal governance, it
is not clear that the bank must have a strategy. The bank charter does not require
the board to approve the strategy, the annual business plan or the budget. However,
the charter does require the board of directors to have comments and guidance on
business plans and development directions of the bank for certain periods. The CEO
is required to draft the business plan for each year and for five years for submission
to the board. The shareholder general meeting has to approve the direction prior
to its operation and development as proposed by the board. Thus, it is apparent
that responsibilities of the general shareholder meeting, the board and the CEO
in making decisions on bank strategy are not delegated clearly and properly. This
situation can be an obstacle to the bank in shaping and implementing strategy.
Risk policy is a key element to good corporate governance. While
the central bank regulations require at least two committees, i. E. The risk management
committee and the human resources committee, the bank now has four committees, i.
E. Supervisory risk committee, policy committee, asset-liability committee (ALCO)
And the personnel and compensation committee. The board has approved risk management
policy and monitors the implementation of risk minimizing measures. The bank also
has departments dealing with respective risks, i. E. Credit risk department, market
and operational risk department and ALCO support department. These are significant
steps that the bank has made recently because, three years ago, the bank did not
have such risk departments in place. In spite of these changes, the liquidity, market
and operational risks are not measured properly as the bank lacks the tools and
expertise in risk management in a more complex and dynamic environment. Financial
risk modelling, such as value at risk, probability of default and maturity mismatch
reports, is not adequate.
The bank currently does not have a risk module to support risk
identification, measuring and monitoring. These limitations can negatively affect
the way the board guides risk management.
Monitoring the effectiveness of the company's governance practices
and making changes as needed (unobserved).
The board is responsible for making decisions on management organizational
structure at head office, branches and subsidiaries and, also, for providing internal
policies and guidelines concerning the governance and operation of the bank. However,
there is no specific requirement for the board to monitor and evaluate the internal
structure on an ongoing basis. Thus, even when in reality the board monitors the
effectiveness of the governance structure, it does not consider this work as one
of its mandatory tasks. As a result, the board does not monitor governance practices
continuously and make changes when necessary.
Selecting, compensating, monitoring and, when necessary, replacing
key executives and overseeing succession planning (partially observed).
The board is responsible for nominating, replacing and setting
compensation for the CEO, deputy CEO and chief accountant. This practice is in line
with the international principle but is different from the regulations given by
the central bank, which requires the general shareholder meeting to approve the
compensation scheme for the CEO. Consequently, the central bank should consider
making adjustments to this issue in its regulations.
For the past four years, several new and young deputy CEOs have
been appointed. This indicates that the bank has undergone significant and positive
change in organizational structure and governance during and after the privatization
process. However, all newly-appointed deputy CEOs used to be senior managers of
the bank for many years and are used to the state management style of inefficient
and passive management. As a result, radical changes are unlikely to happen in the
bank in the foreseeable future.
Under the current governance structure, the board is also responsible
for selecting, terminating the contracts and setting the remuneration for managers
and deputy managers of departments in the head office. However, the Basel principles
recommend that the executives oversee and manage the managers' jobs. As a result,
managers are expected to be nominated by the CEO. However, since the CEO cannot
select subordinates personally, it would be unfair for the CEO to be responsible
for any mistake in doing business if such mistakes are due to having the wrong managers
in office. Consequently, the accountability of the CEO is not clearly identified
under the current governance structure.
Aligning key executive and board remuneration with the longer-term
interests of the company and its shareholders (partially observed).
Compensation and other benefits for directors are based on bank
performance and approved by the general shareholder meeting annually. The board
is responsible for deciding compensation, bonuses and other benefits for the CEO
based on personal and corporate performance. CEO compensation must be reported to
the general shareholder meeting. When the bank incurs losses, the compensation of
the board and the CEO cannot be increased and no bonuses are paid. Such arrangements
can align the executive and board remuneration with the longer-term interests of
the bank and its shareholders. However, it differs from the central bank regulations,
which require the general shareholder meeting to approve the remuneration of the
board and the CEO. This difference should be considered by the central bank as the
Basel recommendations call for the board of directors or personnel and compensation
committee to decide or approve compensation for key executives and the board.
Ensuring a formal and transparent board nomination and election
process (unobserved).
The board of directors is appointed by the shareholder general
meeting. In June 2010, the controlling shareholder was the state holding 70-80%
of total common shares, according to bank reports in 2010. The bank labour union
is the second major shareholder and held about 5% of total common shares. The right
to sell state shares must be in line with state regulations. The bank labour union
is not allowed to sell its shares and the state has the right to nominate the board.
While the bank has a board election procedure, in which the board
directors are appointed by shareholder votes, it is the state that decides the directors.
It is expected that there will be no major changes in the board nomination procedure.
Monitoring and managing potential conflicts of interest of management,
board members and shareholders, including misuse of corporate assets and abuse in
related party transactions (partially observed).
The directors, supervisory board members, key executives and
branch managers are all required to report to the board of directors any potential
conflict of interest, such as the name of any institution in which they hold over
10% of the total shares. Similarly, they cannot make use of their position to help
related parties or individuals borrow from the bank with favourable terms and conditions.
Every quarter, the bank reports to the Stock Exchange Commission on deals in which
related individuals of the board of directors and other key executives buy or sell
the shares of the bank. However, in practice, as the accountability of the board
and CEO has been unclear under the state ownership regime for nearly 20 years, the
present board of directors and management, with the same members, do not manage
conflicts of interest properly.
Ensuring the integrity of the corporation’s accounting and financial
reporting systems, including the independent audit, and that appropriate systems
of control are in place, in particular, systems for risk management, financial and
operational control and compliance with the law and relevant standards (unobserved).
The CEO is responsible for preparing annual financial statements,
consolidated financial statements, income statements and the “management and governance report.“ The board
monitors the reportpreparing process and approves the financial statements and annual
reports of the bank. The board also prepares the bank’s financial and operational
report and the ”evaluation report of governance.“
The supervisory board is responsible for evaluating these reports for disclosure
at the annual general shareholder meeting. This financial reporting arrangement
is unclear and it is difficult to delineate the responsibilities of the CEO, the
board of directors and the supervisory board. The types of reports are not clear
and consistent as there are several similar reports with slightly different names.
The bank has a supervisory board, a supervisory and a risk committee.
However, the functions of these entities are not clear from the point of view of
the bank’s guidelines. The supervisory board is appointed by the general shareholder
meeting and is subordinated to the general shareholder meeting. Its function is
to monitor independently the bank’s operations, management and governance and take
responsibility for the shareholders. Its duties are: (1) To control and oversee
compliance of the board and CEO; (2) Notify the board when a director is found to
have violated regulations and request corrective action and (3) Manage and monitor
the internal audit department and use internal audit personnel in its work. Consequently,
the supervisory board, whose primary function is to supervise the board of directors,
now takes charge of some internal control functions.
While the supervisory board leads and monitors the internal audit
and control system, the board of directors is obliged to decide the structure of
internal audits and to control systems, to nominate and replace key personnel, to
set compensation and issue the internal audit and control policy of the bank. With
this arrangement, the role of the supervisory board is unclear.
In addition, the supervisory board is less likely to be independent,
since the head of the supervisory board used to be a branch manager, which is a
role subordinated to the present CEO.
Sub principle 4: The board should be able to exercise objective
independent judgment on corporate affairs (unobserved).
According to the bank’s charter, the board is required to have
at least five members and a maximum of 11 members (Decree 59/2009/NDCP, 2009). At
least one-third of the directors are non-executive and independent. The number of
independent directors is less than the minimum requirement of the central bank.
The bank charter also sets criteria for an independent director but the criteria
are not as strict as the central bank’s requirements. As required by the central
bank, an independent director is a person who is currently not working or has not
worked for the bank for the past three years. This requirement is not in the bank’s
charter. In fact, the bank now has seven directors. This paper views that none of
them are independent directors as required by the regulations. Five directors had
been senior managers of the banks for many years. The two others are managers of
the central bank – a state regulator – which represents the state shareholder.
In the charter, there is a concept called “part time director,” which refers to a director
who at the same time holds other positions in the bank. These jobs are different
from the position of director.
The above arrangement indicates that the ability of the board
of directors to make independent business judgments is weak and board independence
overall is very weak. This feature is a typical characteristic of a state-owned
corporation. Even when the bank has become a joint stock commercial bank, the lack
of independence in the board is obviously an outcome of the state-ownership structure
and it takes years to evolve into a different form.
While a low level of board independence is one of the main weaknesses
of bank governance, there are several positive changes in board composition, which
has helped reduce the lack of independence of the board of directors. As required
by the charter, board directors cannot be members of supervisory boards. There is
a legal requirement for separation of the position of CEO and chairperson.
In summary, several comments and observations are found in analyzing
the responsibilities of the board of a joint stock commercial bank, which was just
converted from a big state-owned commercial bank.
Firstly, there are many positive changes in governance and management
which increase the supervisory role of the board of directors and the accountability
of the management as compared to the previous state-owned status.
Secondly, the SOCB is big in terms of assets, branch network
and number of staff. The unclear delineation of responsibilities of the board and
the management is an embedded feature of the governance of a bank under state ownership.
As a result, there are several limitations in the corporate governance of the bank,
which will take time to solve. These limitations reveal the fact that the bank does
not have a clear approach for managing a joint stock bank with higher pressure for
efficiency:
• The responsibilities of the board of directors, supervisory
board and management are not clear, especially in terms of financial reports, supervision,
internal control and nomination of managers.
• Important duties that the board should have, as recommended
by the OECD and Basel, are not mentioned clearly in the board of directors’ responsibilities
to the bank. The approval of longterm strategy and business plans are examples.
There are also some duties in which the board should not be involved. The board’s
nominating and replacement of department managers are examples of this.
• The board’s responsibilities are defined more for compliance
than for active management with a forward-looking approach.
• The board’s independence is weak as a consequence of historical
state ownership. It will take time to improve independence as the bank is too big
for a radical short-term change.
• Bank guidelines and policies are not well-written. There are
overlaps among the bank’s internal regulations. For example, the guidelines on governance
have several provisions that are exactly identical to the charter, while the risk
policies are not adequate, as they do not cover risks such as policy risk and operational
risk.
• Bank efficiency is low compared to big joint stock banks, which
have had a long presence in the market. The equity to total asset ratio is 5%, which
is much lower than the 7.8% of its peers. The ratio of asset value for one staff
member is 13 billion VND (approximately 22,300 Vietnamese dong = 1US$) While a big
joint stock bank – one of its peers – has the ratio of 20 billion VND, according
to bank reports in 2009 and 2010. The inefficiency of the bank can be explained
by the weak corporate governance system, as described above.
4.2. The Joint Stock Bank (JSB)
4.2.1 Bank Overview
The JSB was established in the early 1990s as one of the first
joint stock commercial banks when Vietnam was in the early stage of moving towards
becoming a market economy. The bank ranks among the top ten biggest banks in terms
of capital and has about 200 branches and transaction offices all over the country.
The JSB has major shareholders and an institutional shareholder which is an international
bank. The bank has a board of directors and a board of management headed by the
CEO or general director and a supervisory board. The supervisory board is subordinated
to the general shareholder meeting, not to the board of directors.
4.2.2 Board Duties
Sub-principle 1: The Board of Directors should act on a fully
informed basis, in good faith, with due diligence, and care, and in the best interest
of the bank and the shareholders (partially observed).
From a legal perspective, “duty of care” is handled
in the same way as in the SOCB in that there is no explanation on what behaviour
is common in a particular situation. However, this duty is more emphasized in the
JSB than in the SOCB as it is specifically placed in a separate provision in the
charter. The JSB was originally established as a joint stock organization with private
shareholders and, therefore, the board and management staff are expected to be aware
of the common behavioural norms.
The duty of loyalty is legally and practically better than that
in the SOCB. The duty of loyalty is clearly stipulated in a separate provision in
the charter. Besides the responsibilities of loyalty and disclosure of potential
conflicts, the board directors, the CEO and management staff are not allowed to
buy and sell the banks’ shares if they have inside information that other shareholders
do not have. In the SOCB, this issue is not formally and specifically mentioned
in the guidelines.
The board of directors is expected to be informed on time. The
supervisory board is obliged to report on bank performance to the board of directors
frequently. The CEO is required to report to the board of directors. The directors
have the right to examine the general ledger, the list of shareholders and other
documents of the bank in the course of their work.
However, while there are provisions for procedures to convene
and handle meetings, meeting frequency is not mentioned in either charter or guidelines
on the board operation. This indicates that the board’s access to information can
be limited from legal perspective. The bank also has a management information system
in place. However, it needs to be improved in order to provide the board with more
information, including profitability by customer type, products and employees in
order to improve decision-making processes.
It should be noted that among the nine directors, four directors
including the chairperson hold from one to five other positions such as chairperson,
vice chairperson and directors on boards of other companies. Serving many high positions
can affect the time and resources that the directors are able to devote to the bank
and can, therefore, have a negative impact on their performance.
Sub-principle 2: Where board decisions may affect different shareholder
groups differently, the board should treat all shareholders fairly (unobserved).
The bank has major shareholders. It also has a policy of restricting
the maximum number of shares that can be held by a single state enterprise, institution,
individual or even group of related people. The upper limit for a state enterprise
is 40% of the bank’s chartered capital. That limit for an institution is 30% of
the chartered capital and an individual can hold shares up to 15% of the total chartered
capital. These limits indicate that the equity structure is likely to be balanced
among a group of shareholders or major shareholders. From this perspective, the
controlling power of a group of shareholders or an individual shareholder is not
so strong. In this case, the minority shareholders and other groups of shareholders
are expected to be better protected than in the case of the SOCB.
However, as the current legal framework does not protect minority
shareholders properly, the minority shareholders in the banking system are not well
protected in relation to the OECD principles.
Sub principle 3: The board should fulfill certain key functions:
Reviewing and guiding corporate strategy, major plans of action, risk policy, annual
budgets and business plans; Setting performance objectives; Monitoring implementation
and corporate performance; And overseeing major capital expenditures, acquisitions
(materially observed).
The JSB has business strategies for the mediumand long-terms.
The board is responsible for the approval of strategies and also approves the annual
budget and the business plan. The bank’s business plan appears to be clear and comprehensive
as it covers financial issues and many other aspects of operation. They include
plans to develop the network, policies, products, targeted customers, human resources,
information technology, service quality and public relations of the bank. In 2010,
the bank has a clear strategy with five core cultural values approved by the board.
This fact indicates that the board is aware of its role in guiding strategy and
it is setting the tone for the culture of the whole bank.
The board is required to monitor the implementation of approved
plans and evaluate bank performance. It is also responsible for the approval of
risk policies and for monitoring the implementation of corrective actions. The role
of the board in mergers and acquisitions (M&A) Is not clearly defined in the
charter, mainly because central bank regulations on the liquidation or M&A of
banks are very weak and inadequate at present.
Monitoring the effectiveness of the bank's governance practices
and making changes as needed (partially observed).
The board is required to decide about the structure of the head
office, internal audit and branches. However, there are no specific requirements
for the board to evaluate the efficiency of the internal structure of the bank in
terms of policies and guidelines. The lack of this legal requirement can have a
negative impact on the board’s role of monitoring the bank.
However, for the past two years, the bank has made significant
changes in its organizational structure. The JSB has adopted a more customer-orientated
approach by restructuring its business into sales and distribution, product and
services and support divisions. Changes have been made in the structure of risk
management and of credit supervision divisions in order to improve risk management
quality.
The JSB is observed to be active in response to external changes
such as regulations and market forces and to initiate changes for its own efficiency.
Their policies and guidelines have been amended regularly. The charter has been
amended annually. Other policies and guidelines have been amended including guidelines
for loan approvals, guidelines for bank network development and policies concerning
loan trading, internal communications and managing subsidiaries. For the past two
years, the JSB has built its nomination and compensation policy, which recognizes
the staff’s contribution to the bank and assesses employee capability, thereby enabling
them to be adequately rewarded and in a timely manner.
While the bank needs to have a legal requirement for the board’s
responsibility in monitoring and updating bank policies, in practice, the bank has
fulfilled this duty quite well in recent years.
Selecting, compensating, monitoring and, when necessary, replacing
key executives and overseeing succession planning (materially observed).
The board is responsible for nominating, replacing and setting
compensation and other benefits for the CEO, deputy CEO and chief accountant, which
is the same as in the SOCB. However, such delegation of responsibilities is different
from the regulations of the central bank, which requires the general shareholder
meeting to approve the compensation scheme for the CEO. This difference should be
considered by the central bank because the current regulations are not in line with
the Basel recommendations.
The chairperson is required to make a working schedule and allocate
tasks to the board members in writing. The chair is responsible for the evaluation
of performance of each director at least once a year and for reporting at the general
shareholder meeting. Thus, delegation of responsibilities is very clear and this
provides a good base for effective evaluation of directors’ performance.
For the past few years, key executive turnover is stable as the
CEO has been with the bank for ten years. As the bank’s financial performance has
been above average, the long-term service of the CEO is not found to be problematic.
Aligning key executive and board remuneration with the longer
term interests of the company and its shareholders (partially observed).
Criteria for management and board remuneration cannot be obtained.
They are neither disclosed publicly nor included in the annual general shareholder
meeting. However, the bank has enhanced the nomination and compensation policy so
that high quality personnel can be retained. From personal observation, the key
executive turnover was not as high as in other joint stock banks when the competition
for good quality bank executives was fierce.
When the bank incurs losses, the compensation of the board and
CEO cannot be increased and no bonuses are paid. Such arrangements can align executive
and board remuneration with the longer term interests of the bank and its shareholders.
The bank also has a personnel and remuneration committee, which helps the board
of directors in deciding the level of compensation.
Ensuring a formal and transparent board nomination and election
process (partially observed).
In the guidelines for the board’s structure and operation, only
criteria and conditions for director nomination are specified. There are no guidelines
for the nomination process and the back-up personnel plan. Criteria and other requirements
for directors are clear and well in line with the central bank’s regulations.
Monitoring and managing potential conflicts of interest of management,
board members and shareholders, including misuse of corporate assets and abuse in
related party transactions (partially observed).
Directors, supervisory board members, key executives and branch
managers are all required to report, as early as possible, to the board of directors
all potential conflicts of interest that they might experience with respect to other
institutions. They cannot make use of their position to help related parties or
individuals borrow from the bank at favourable terms and conditions. Every quarter,
the bank reports to the Stock Exchange Commission on deals in which relevant individuals,
board directors and key executives buy or sell shares in the bank. However, it is
observed that there are close social ties among board directors and the head of
the supervisory board, as they are currently working for the same company besides
the bank. Consequently, conflicts of interest are not expected to be well managed.
Ensuring the integrity of the corporation’s accounting and financial
reporting systems, including the independent audit, and that appropriate systems
of control are in place, in particular, systems for risk management, financial and
operational control and compliance with the law and relevant standards (partially
observed).
The bank has three top-down layers for monitoring and supervising
operations, i. E. The supervisory board, internal audit and risk committee and the
internal audit and control system:
• The supervisory board is appointed by the shareholders. It
is responsible for overseeing and monitoring the operations of the board and the
management on behalf of the shareholders. While the criteria for the supervisory
board members are set clearly and there are criteria for independence, the guidelines
on operation of the supervisory board do not set a minimum number of independent
members. In practice, the head of the supervisory board is not independent, as he
has been the chief accountant and branch manager of the JSB for many years. The
qualifications and experience of the supervisory board are not as strong as those
of the board of directors. All these factors can negatively affect the independence
of the supervisory board.
• The internal audit and risk committee exists to support the
board in ensuring the integrity of the accounting and reporting system. It also
provides consultancy to the board and helps the board improve its risk supervision.
• The internal audit and control system is under the management
of the CEO who monitors operations of departments and branches. However, the board
is responsible for issuing the guidelines on structure and operations of internal
audit and control. It is also obliged to nominate, replace and set remuneration
for internal audit and control staff. Such arrangements can improve the independence
and efficiency of the internal audit and control function.
• These three layers of control and supervision have helped in
enhancing the control of efficiency. However, the bank should be assured that the
reporting lines of these entities are clearly defined, since otherwise overlapping
lines might hinder the bank’s operations.
Risk management has been improved and has been moving towards
international best practice since 2008:
• In 2008, a risk management module was established and this
helps to monitor and to measure the capital adequacy ratio according to Basel principle
2. Interest and exchange rate risks are also managed. Credit risk management was
improved through introducing an internal rating system and centralized loan approval.
The improvement in risk management has facilitated the design of new products based
on risk management by customers.
• The foreign institutional shareholder, with its international
expertise and experience, has supported technology, training, governance, risk management
and product development. As a result, significant progress has been made in risk
management at the bank.
• Other risks are also managed in the bank, such as policy risk
and operational risk.
However, since close ties between the board and the head of the
supervisory board exist, it is possible that the board may not always ensure the
integrity of financial reports as shareholders would expect.
Sub principle 4: The board should be able to exercise objective
independent judgment on corporate affairs (partially observed).
The board is required to have a minimum of three directors and
a maximum of 11 directors. At least half of the directors are independent and non-executive.
The provisions of board composition and independence fully follow the central bank
regulations.
The criteria for an independent director are clearly defined
in the charter. The bank has nine members. While information is not adequate for
identifying the number of independent directors, an overall review of directors’
CVs indicates that the independence of the board in business judgment seems to be
higher than in the SOCB, since the backgrounds and experiences of the directors
are diversified, international and strong. Six directors have had experience in
construction, trading, airlines, equipment and finance before becoming directors
at the bank. Their educational background was good as most of them were internationally
educated and have worked overseas. Foreign directors representing a foreign institutional
investor – an international bank – are also experienced in international banking
operations and audits.
The charter does not allow the chairperson to participate in
the board or management of any other financial institutions. As required by law,
the chairperson cannot be the CEO or deputy CEO at the same time. These restrictions
on the number of positions held can enhance the independence of the board.
However, it should be noted that three directors and the head
of the supervisory board are currently working with the same corporation besides
the JSB. There are also other directors who are working in the same corporation.
Consequently, the bank is governed by a board of directors that is dominated by
groups of related directors.
To summarize, the following comments and observations are found
in evaluating the responsibility of the board of the JSB:
The JSB is found to be able to respond actively to external changes
and to initiate changes for continuous selfimprovement. Changes have been implemented
in many areas, including policies and procedures, information technology and organizational
structure.
The bank’s policies and guidelines are clearly designed and applicable.
Although policies have been monitored and changed, there is no legal requirement
for the board to monitor or evaluate the effectiveness of policies and make changes
as needed. The bank should incorporate this duty in its charter.
The domination by groups of related directors and the weaker
position of the supervisory board as compared to the board of directors indicates
that social relationships and personal acquaintance plays a role in corporate governance
in the bank and that treatment of all groups of shareholders is less likely to be
equal. Minority shareholders are not, therefore, well protected.
The bank ranks among the biggest joint stock banks and has a
long presence in the market. The equity to total asset ratio is relatively high
(7.8%). The ratio of assets per employee is 20 billion VND. As compared to the SOCB,
the JSB holds a better position and is more efficient, according to bank reports
in 2009 and 2010. The branch network and number of staff is smaller than the SOCB.
This better performance can be explained by the better corporate governance of the
bank.
4.3 Summary of Assessment Results
The below summary of assessment result is obtained from analysis
in parts 4.1 and 4.2.
Principle VI: Responsibilities of the board of directors
SOCB JSB
SP2: Where board decisions may affect different shareholder groups
differently, the board should treat
UO UO
Monitoring the effectiveness of the company's
UO PO
Aligning key executive and board remuneration with the longer
term interests of the company and its shareholders
PO PO
Monitoring and managing potential conflicts of interest of management,
board members and shareholders, including misuse of corporate assets
PO PO
Sub principle 4: The board should be able to exercise objective
independent judgment on corporate affairs
UO Po
Table 1: Summary of Observation of Principles and Guidelines
in the Two Banks Studied; Source: Original Research (note: UO = unobserved; PO =
partially observed; MO = materially observed).
5. Conclusions and Policy Implications
The role of the board of directors in Vietnamese banks is found
to be most commonly only partially observed compared to the OECD and Basel principles
of corporate governance. Regulators and bank directors need to expend further efforts
to develop a proper corporate governance framework. There is also a gap between
central bank regulations concerning corporate governance and the actual practices
of the banks.
It is found that the JSB has better corporate governance, which
is closer to international principles than the SOCB, which is a newly privatized
joint stock bank. The responsibilities of the JSB board are clearly defined in the
bank’s guidelines and are more effective in practice. State management, which was
characterized as passive and suffered from unclear delineation of responsibilities,
was found to be embedded in the current governance of the newly-privatized bank.
This can be an obstacle to the bank’s development since it may mean the bank will
be unable to make changes. Consequently, the government should gradually reduce
its support and set the tone for changing the culture of newly-privatized banks.
The weak independence of the board of directors is found in both
banks because of the dominance of the controlling state shareholder or a group of
related directors. Personal relationships play an important role among the directors
and, therefore, the protection of minority shareholders and the control function
of the supervisory board are weak. The strong power of the chairperson, as a consequence
of a past position higher than that of a supervisory board member, gives rise to
less independent supervisory boards.
The central bank should revise the existing regulations concerning
organization and operations especially with respect to the duties of general shareholder
meetings, boards of directors and CEOs to ensure the accountability and independence
of the boards and their executives. An effective and enforceable supervision framework
should be put in place to close the gap between the actual practices of Vietnamese
banks’ corporate governance and the regulations governing it.
It is generally expected that international principles of corporate
governance are applied in all countries. However, the straight transplantation of
international principles into the local context will not bring benefits if the legal
framework and institutional environment are weak (Yuka, 2007). In order to apply
these principles to the Vietnamese banking system effectively, the necessary conditions
should be prepared and more research should be done. First, an evaluation of the
impact of the current regulations on bank organization and operations and on banking
system performance should be conducted. Second, the main unique characteristics
of the Vietnamese banking system should be identified and their impact on bank performance
should be researched. The above observation highlights a need for further research
on the impact of social relationships among directors and executives on the efficiency
of the board of directors, the supervisory board and the CEO. The findings of such
a research study would provide suggestions for regulators for properly regulating
the governance of banks in Vietnam. Finally, the central bank's implicit support
of the banking system should be gradually reduced to create transparency and clearer
accountability of bank directors.
6. References
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Operation of Commercial Banks in Vietnam was issued by the Government of the Socialist
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